Friday, June 28, 2013

“The definition of inflation is an expansion in the money supply… The Fed is buying $85 billion a month of Treasuries and mortgages. Where do you think that money is coming from? It is being created into existence out of thin air by the Federal Reserve… Eventually our trading partners are going to stop absorbing our inflation. The dollar is going to tank… and all this inflation that we’ve been exporting is going to hit us like a tsunami.”

Thursday, June 27, 2013

By: Peter Schiff
Tuesday, June 25, 2013 This piece is excerpted from the June 2013 edition of the Global Investor newsletter. See the full version here.Source: businessinsider.com

The Japanese stereotype of excessive courtesy is being confirmed by
the actions of prime minster Shinzo Abe who is giving the world a free
and timely lesson on the dangers of overly accommodative monetary
policy. Whether or not we benefit from the tutorial (Japan will surely
not) depends on our ability to understand what is currently happening
there.

For now most economists still believe that Abe has stumbled upon the
magic elixir of economic revitalization. His commitment to pull his
country out of the mud by doubling the amount of yen in circulation, and
raising the nation's official inflation rate to 2%, had conferred rock
star status on the formerly bland career politician. But just one year
after his first critical raves arrived, the audience is heading for the
exits. As it turns out, the Japanese miracle may be a simple tale of
confidence easily gained, and just as rapidly lost.

In many ways the 75% nine month rally in the Nikkei 225 (that began
when Abe was elected prime minister in September 2012), and the
subsequent crash that began on May 22, is not all that different from
the turbocharged rally, and spectacular crash, that occurred in
technology heavy Nasdaq more than a dozen years ago here in the United
States.

At the time that Pets.com
(the company behind the iconic Sock Puppet) made its IPO, other high
flying tech stocks had racked up 1000% gains. While investors scratched
their heads, pundits offered reasons why common sense no longer applied
to the new economy. We were told that valuations, revenue and profits no
longer mattered. And to an extent that now seems absurd, the investing
establishment bought into the insanity. But then a funny thing happened,
investors woke up and realized that they had nothing but a handful of
magic beans that couldn't grow a beanstalk. When the fog lifted, stocks
plummeted...Wile E. Coyote style.

This time around investors in the Japanese market were similarly
deluded by fairy tales. Leading economists told them that Japan could
cheapen its currency to improve trade, use inflation to create real
growth, increase prices to encourage spending, and drastically increase
inflation without raising interest rates. In short, monetary policy was
seen as substitute for an actual economy.

Initially at least the economic data seemed to confirm the success of
Abe's program. The leading indicator was the yen itself, which dropped
like a stone. Given the widely held view that a weak currency is the key
to economic success, the 25% decline in the yen was welcomed as good
news. Soon thereafter, the inflation that Abe so eagerly sought began to
materialize in various sectors of the economy. When the Nikkei reacted
positively to these developments, momentum traders from around began to
take notice, thereby creating self-fulfilling prophecy.

But it's no great trick to weaken a currency. Any two bit economy
could accomplish that objective. For a nation like Japan that imports
nearly all of its raw materials it was inevitable that a drastically
cheaper yen would to push up prices. However the rest of the plan, the
part about surging exports and growing economic activity, has been much
harder to achieve. In fact the data has been downright disheartening.
The plunging yen has failed to reverse Japan's weakening trade balance
which has declined for 28 straight months. The trend finally sent Japan
into an overall trade deficit 10 months ago for the first time in 30
years. The latest data confirms that while the yen value of exports has
increased, actual trade volume has fallen.

While the broad economic data failed to impress, economists and
investors were nevertheless hopeful that Abenonmics would eventually
work its magic. But recently the bottom has fallen out in a way that
should have surprised no one, but somehow managed to do just that.
Beginning in April Japanese Government bonds began to sell off sharply.
Previously, the Japanese government could borrow funds for 10 years at
just 36 basis points.

The truth is that the sub 40 basis point yield on Japanese Government
bonds was the most important data point for their economy. At those
levels, Japan needed to spend 25% of its tax revenue to service its
outstanding debt. While that figure is high, most it is manageable given
Japan's high savings rate. However, with a national debt that exceeds
200% of GDP, the Japanese government could quickly become insolvent in
the face of higher debt service costs. If rates on 10 year debt were to
ever match the 2% of their inflation target, more half of total tax
revenue would be needed to service debt payments.

But the central premise of Abenomics seems to be that the Bank of
Japan could push up inflation to 2% without raises the rates on
long-term debt. To do this one would have to assume that bond investors
would accept negative interest rates, even while a falling yen was
eating away at principle and returns on alternative investments would be
expected to be more attractive. Such an outcome is not consistent with
human behavior.

As a result, in late May a strong sell off in Japanese government
bonds caused yields to nearly triple to almost 100 basis points on 10
year debt. And while one percent doesn't sound like much, it was the
rapidity of the ascent that got everyone's attention. This grim, but
very simple, reality seems to have hit Japanese stock investors with a
panic unseen since Mechagodzilla took aim at Tokyo. Knowing that even
moderately higher rates could counteract any economic gains made by
stock market or export growth, the faith in Abenomics has seemed to
evaporate almost overnight. Sounds a little like the dot-com bubble,
doesn't it?

“If [gold] does [drop to $1,000], I don’t think it’s going to stay there very long. I think the price is going much higher. Not only than where it is now, but higher than $1,900, which was the peak of this recent move. I think this decline is being driven entirely by speculators.”

The incredible rise of Japanese stocks, and the gut-wrenching correction that recently ensued, have only one parallel for Peter Schiff: The dot-com bubble of the late 1990s and 2000.

In both rallies, investors shifted away from accepted means of valuation, and were instead "deluded by fairy tales," Schiff said. As tech stocks skyrocketed, "We were told that valuations, revenue and profits no longer mattered."

And as Japan embarked upon a policy of massive quantitative easing, "monetary policy was seen as a substitute for an actual economy."

Now the Japanese Nikkei index sits nearly 20 percentage points below its late-May peak. But Peter Schiff, the CEO of Euro Pacific Capital, said it could get much worse.

"The Japanese government could quickly become insolvent," Schiff said. This would happen if Japanese bond yields continued to rise, for "if rates on the 10-year debt were to ever match the 2 percent of their inflation target, more than half of total tax revenue would be needed to service debt payments."

But Miller Tabak's chief economic strategist, Andrew Wilkinson, does not believe that Schiff's concern is a serious one. "My opinion is that it probably won't happen," Wilkinson said regarding Schiff's nightmare scenario.

"The nature of the Japanese bond market is that the majority of investors are domestic. So I don't see foreign investors throwing in the towel as being a big-picture driver here."

“We know at $1,200 [an ounce], the majority of gold mines can’t even mine [gold] profitably. So gold is now trading for less than the cost of producing it, and of course in order to produce it you have to own a gold mine, which is very hard to do. So the price of gold can’t stay down here for a long period of time, because then the gold companies will shut down and there will be no supply.”

Tuesday, June 25, 2013

“Really what’s happened, there’s been a crash in confidence. There’s been a crash in investor expectations when it comes to the price of gold. There actually hasn’t been a crash in the price. I think the sentiment is wrong, that the public is wrong, that the professional investors are wrong. Remember – the guys that are ultra bearish on gold right now are the same guys that were extremely bullish when it was at the highs at 1900. The consensus doesn’t have a very good track record when it comes to gold.”

“Unless Ben Bernanke comes clean and admits there’s no tapering, that there’s no exit strategy, that he is going to increase – not diminish – QE, then the markets are going to keep falling… The whole thing is a bluff. There is no exit strategy, there is no tapering, but he can’t admit that.”

“When the gold market wakes up to the fact that there is no tightening, there’s just endless easing, that we just have one big bubble – then I think we’ll have a mass scramble on the part of everyone who sold their gold to buy it back. Where they’re going to get it, I don’t know. Who’s going to be sellers at these levels once that moment happens…I don’t know. So I would expect to see a very, very rapid rise in the price of gold.”

Monday, June 24, 2013

“The Fed is going to have to wave the white flag, not me. They’re going to have to admit that it hasn’t worked and they’re going to up the size of QE. Meanwhile, the gold traders are preparing for something that’s not going to happen and they’re going to be caught by surprise. You’re going to see a vicious rally in gold as people look to re-buy the gold they sold based on the false premise that the economy was improving and the Fed was going to tighten.”

“As usual the Federal Reserve media reaction machine has fallen for a poorly executed head fake. It has fallen for this move many times in the past, and for its efforts, it has tackled nothing but air. Yet right on cue, it took the bait once more. Somehow the takeaway from Wednesday’s release of the June Fed statement and Chairman Ben Bernanke’s press conference was that the central bank is likely to begin scaling back, or “tapering,” its $85 billion per month quantitative easing program sometime later this year, and that the program may be completely wound down by the middle of next year.

Although this scenario is about as likely as an NSA-sponsored ticker tape parade for whistle blower Edward Snowden, all of the market segments reacted as if it were a fait accompli. The stock market – convinced that it will lose the support of ultra-low, long-term interest rates and the added consumer spending that results from a nascent housing bubble – sold off in triple digits. The bond market, sensing that its biggest and busiest customer will be exiting the market, followed a similarly negative trajectory. The sell-off in government and corporate debt pushed yields up to 21 month highs. In foreign exchange markets, the dollar rallied off its four-month lows based on the belief that Fed tightening will support the currency. And lastly, the gold market, sensing that an end of quantitative easing would eliminate the inflationary fears that have partially fueled gold’s spectacular rise, sold off nearly five percent to a new two-and-a-half year low.

All of this came as a result of Bernanke's mild commitments to begin easing back on permanent QE sometime later this year if the economy continued to improve the way he expected. The chairman did not really elaborate on what types of improvements he had seen, or how much farther those unidentified trends would need to go before he would finally pull the trigger. He was however careful to point out that any policy shift, be it for less or more quantitative easing, would not be dependent on incoming data, but on the Fed's interpretation of that data. By stressing repeatedly that its data goalposts were "thresholds rather than triggers," the chairman gained further latitude to pursue any stance the Fed chooses regardless of the data. ”

“This whole recovery that the Fed believes it created with the QE is evaporating before it even dials it back. I think the that the next thing the Fed is going to do is add to the QE. … They are going to put more crack into the pipe.”

Thursday, June 20, 2013

“Are we richer or we poorer? Are we growing our liabilities or are we growing our assets? America is getting poorer. We are consuming our way into poverty. We’re borrowing from the rest of the world. We’re trying to reflate a phony economy based on assets prices like real estate and stocks. Meanwhile, the real economy deteriorating beneath our feet.”

The dirty little secret of finance is that everyone is making it up on the fly. Economics is a social science focused on human behaviors. People have a habit of behaving in ways they "shouldn't." Other scientific pursuits have tangible answers where economics has a collection of best guesses. The speed of light is a constant but the velocity of money is subject to the collective whims irrational masses.

For the better part of six years the FOMC has been doing its best to give away money. On an institutional, level money is essentially free. The notion driving this Federal Reserve largesse was the idea that free money would get spent, thus stimulating the economy. There should be inflation right now. Instead the economy is listless, almost sedated.

If market participants seem on edge it's only because everything they once believed to be true is either being shown to be utterly false or the delay between cause and effect is so long that the theory is pointless.

“What happens now when the next recession starts under these conditions, where you still have … 20 some million people underemployed, 47 million people on food stamps, and you have a downturn? All they can do is spend more money and print more money – and there’s a limit to this. And I think we’re at that point. … Eventually the market will rule, and it won’t be a happy scene.”

Monday, June 17, 2013

“People are underestimating just how much interest rates are going to go up, how fast rates are going to rise, and what the impacts are going to be on the economy, on the housing market, on the stock market, on the banks, and the government’s ability to service its debts.”

Wednesday, June 12, 2013

“Gold is not going down because long term rates are rising. In fact, I think long term rates are rising because inflation expectations are rising, because people are losing confidence in the ability of the Fed to dial back the QE. They’re losing confidence in the credit worthiness of the United States… I think you’ve got a great buying opportunity in the gold market. On the other hand, the bond market is topping out. You’ve got a bubble that is burst in the bond market, and so the bond market is just starting its decline. I think the gold market is about finished with its decline.”

Tuesday, June 11, 2013

“When the gold market turns, it’s going to be vicious. I think
it’s going to rally even faster than it went down. But rather than
worrying about the top of the gold market – I don’t think there’s a top
there – but there is a big top in the bond market. And this is the
achilles heel of the US economy. And people were worried about tax
hikes. Higher interest rates are much bigger tax hikes than what we were
looking at when we were worried about the fiscal cliff or the
sequester. This is big and it’s a tax hike on the US government. Not
just on the American people but on the US government itself.”

Friday, June 7, 2013

“I think Wall Street has been trying to convince itself that despite the
data, the U.S. economy is actually recovering,” says Schiff. “And I
think over the last several weeks so many data points have come in to
disappoint this fantasy of an economic recovery, that I think maybe it’s
finally starting to set in.”

Wednesday, June 5, 2013

That's all, folks. One look at the headlines will tell you the gold bull
market is officially over: the stock market is booming, a modest
recovery of the US economy is underway, and the dollar is dominating the
forex. Time to sell your bullion and get back into US stocks!

Does
anyone really believe this story at this point? Haven't we been through
this time and again since 2008? Remember "green shoots"?

The sad
truth is that American investors, accustomed to a world of rising stock
and housing prices for several generations, are experiencing short-term
memory loss. It's as if their longing for the "good old days" has made
them subconsciously suppress any unpleasant memories.

The Return of Irrational Exuberance

But
it wasn't so long ago that irrational exuberance over the housing
market had seized investors' logic, and the same thing is happening to
US stocks right now. Fair-weather investors are abandoning gold equities
and jumping into the US market in the hopes of making an easy buck,
just as people bought property near the housing peak hoping to flip it
before those adjustable-rate mortgages reset. This is a game of chicken
that makes big banks rich while destroying the savings of average
investors.

So-called experts are pointing to the buoyancy of US
stocks and weakness of the precious metals as proof of their viewpoint -
but the fundamentals of the economy are still dismal. Unemployment
remains persistently high and manufacturing continues to struggle. In
April, the Fed reported that industrial production shrank 0.5%.

The
only growing part of the economy is consumption and services. Indeed,
US consumer confidence just hit a 5-year high! But this week's revisions
to first-quarter GDP revealed that the household savings rate fell to
an abysmal 2.3% and real disposable income plunged by an annualized rate
of 8.4%. It seems that both rising asset prices and consumer confidence
are based solely on the expectation of an improving economy that is
still unsupported by the data itself.

The Currency War Heats Up

Perhaps
people think things are different this time because of the news from
the fronts of the international currency war. Everywhere you look,
once-strong economies have begun to vie for exports by devaluing their
currencies.

Switzerland had one of the strongest European
economies before its central bank capped the value of the franc against
the euro in 2011, vastly diminishing its citizens' purchasing power. The
Japanese yen, once the most stable currency in Asia, is falling victim
to even more grotesque devaluation policies. Out of irrational fear that
their exports will not be able to compete with the yen, Australia and
New Zealand are the latest to jump into the fray by cutting interest
rates.

Dollar By Default?

Many are examining these conditions and concluding that the US dollar is now the last resort for global capital.

However,
this is a narrow and flawed view. The foreign exchange market is
typically quoted based on relative valuations, examining one fiat
currency through the lens of another. It says nothing of the fundamental
value of a currency in terms of goods and services. It is entirely
possible for all fiat currencies to collapse simultaneously, even as
certain currencies "rise" relative to others. In fact, that is the
likely outcome of this race to debase, which in turn is tremendously
bullish for gold.

The only way to avoid the collateral damage of
the currency war is to refuse to participate. That means selling fiat
cash and buying precious metals, commodities, and equities. That is
precisely what people are doing in those countries where currency
devaluation is well underway - from Japan to Switzerland, everyday
citizens are buying gold and silver in record quantities.

A Great Paradox

How can it be that people are rushing to buy physical precious metals around the world and yet the price keeps falling?

This
correction is being driven by institutional investors in the paper gold
market. There is big money betting against gold and on the Fed. I
believe they are in for a rude awakening.
This correction was
kicked off by whispers that the Fed might start drawing down QE3 in
September. That would indeed be reason to re-evaluate one's precious
metals holdings. But, predictably, the Fed immediately backpedaled,
insisting that it would, if anything, only "taper" the QE at some point
in the future. John Williams, head of the San Francisco Fed, then came
out and said, "You could even imagine a scenario where we adjust it
downward based on good data and then adjust it back."

Again, how
many times are the mainline financial institutions going to fall for
this song-and-dance? It's as if these investors are parents of a drug
addict wiring money yet again on a promise that this time the kid will
clean up his act. It's not going to happen until he hits rock bottom! In
the case of the Fed, 'rock bottom' means a dollar crisis with US
consumer prices spiraling out of control.

Would you trust the New York Fed with 7,000 tons of the yellow metal?
Perianne talks to Peter Schiff about what central banks are doing with
gold. Then, Prime Interest Producer Justine Underhill explains what
exactly the Fed has been doing vis-a-vis QE.

Tuesday, June 4, 2013

In his latest video blog, Peter Schiff picks apart the data the media
keeps touting as proof of a recovery. He analyzes the Federal Reserve
Advisory Committee’s latest meeting minutes in which they admit
quantitative easing has been a failure, confirming all the claims Peter
has made for years about the real effects of QE. Peter also talks a bit
about a possible bottom in the gold price after a drop in the spot price
on Friday corresponded with the biggest weekly gain for gold stocks
since January 2012.

“[The Fed's Advisory Council is] admitting that
the Fed’s monetary policy has not been effective. It hasn’t produced
legitimate economic growth. All it’s done is inflate asset bubbles that
have made us feel good, that have made us borrow too much money and
spend too much money. The Fed has completely distorted the market, and
that when the QE stops it’s going to be a complete disaster. That’s
basically what they say. The party’s going to end and it ain’t going to
be fun.”

Latest news, comments and media appearances of Peter David Schiff - the CEO and Chief Global Strategist of Euro Pacific Capital and CEO of Euro Pacific Precious Metals, LLC, a silver and gold dealer. His insights about the US and global economy, fiscal cliff, US dollar, precious metals and the Fed.